Weekly Market Update, March 30, 2020

Soaring Unemployment Signals First Wave of Economic Damage

What the Stimulus Package Will (and Won’t) Do for the Economy

 

Weekly Market Update, March 30, 2020

General Market News             

• The 10-year Treasury yield opened at 0.61 percent Monday morning. The 2-year yield opened at 0.26 percent, while the 30-year yield remained at elevated levels, opening at 1.25 percent. The anticipation of the U.S Treasury issuing a record amount of 30-year debt to pay for the $2 trillion stimulus package is keeping the long rate higher. The effects of the coronavirus on American lives and the economy are still somewhat unknown, but more volatility is expected in the coming weeks. 
• Last week, we saw a notable bounce in those indices that have been among the most beaten down during the sell-off. The Dow Jones Industrial Average led the way, followed by the Russell 2000 and MSCI EAFE. As of the end of the week, these indices were down 32.41 percent, 39.04 percent, and 31.26 percent for the year, respectively.
• On a sector basis, utilities, industrials, and REITs were among the top performers for the week, due to consumers flocking to bond proxies as Treasury yields have come down. The worst-performing sectors were communication services, consumer staples, and health care. The latter two have garnered a lot of attention from investors since the start of the downturn. Individual names such as Walmart, Clorox, and Costco sold off slightly as elevated demand began to subside. WTI crude oil also fell for the fifth straight week.
• The $2 trillion stimulus package signed into law last Friday included approximately $367 billion in small business loans and another $500 billion in loan and loan guarantee programs for affected industries, cities, and states. The result was a rebound for some of the hardest-hit businesses since the start of the coronavirus pandemic, including Delta Airlines, American Airlines, and United Airlines, which all recovered more than 34 percent on the week. Boeing, whose stock had fallen from a 52-week high of $398.66 to a low of $89 two weeks ago, has now recovered more than 70 percent.
• On Tuesday, February’s new home sales report was released. New home sales fell by 4.4 percent during the month; however, this is solely due to January’s record result being revised from 764,000 to 800,000. February’s pace of new home sales, at 765,000 during the month, would have represented the best reading for the index since 2007 if January hadn’t been revised up. While this can be a volatile figure on a monthly basis, we saw a notable uptick in new home sales throughout 2019, and the strong results in January and February show that the housing market continued to excel to start the year.
• Wednesday saw the release of the preliminary estimate of February’s durable goods orders report. Orders increased by 1.2 percent during the month, against expectations for a 0.9 percent decline. This better-than-expected result was due to a large increase in volatile transportation orders. Core orders, which strip out the impact of transportation orders, declined by 0.6 percent during the month, which was worse than the expected 0.4 percent decline. Core durable goods orders are often used as a proxy for business investment, so this decline is concerning. It indicates businesses were pulling back on spending in February, likely due to uncertainty regarding the spread of the coronavirus.
• On Thursday, the third and final estimate of fourth-quarter gross domestic product growth was released. The economy grew at an annualized rate of 2.1 percent during the quarter, which was in line with the previous estimate. Personal consumption growth was revised up slightly, from 1.7 percent in the second reading to 1.8 percent in the final report. This was an unsurprising report that confirmed the slow but steady economic growth we saw in 2019.
• On Friday, February’s personal income and personal spending reports were released. The reports showed continued steady growth in February, with income rising by 0.6 percent and spending rising by 0.2 percent. This was better than estimates for 0.4 percent income growth and in line with estimates for 0.2 percent spending growth. These solid results showed that consumers were on solid footing to start the year; however, these figures will face significant headwinds in upcoming months.
• Finally, on Friday, the second and final reading of the University of Michigan consumer sentiment survey for March was released. Sentiment fell dramatically from an upwardly revised 95.9 mid-month to 89.1 at month-end. This was worse than economist estimates for a smaller decline to 90. This marks the largest monthly drop since October 2008, as consumers clearly felt the effects from the enhanced efforts to combat the spread of the coronavirus enacted in March. High levels of consumer confidence traditionally support faster spending levels, so this sharp decline is a bad sign for future consumer spending reports.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	10.28%	–13.84%	–20.96%	–7.93%
Nasdaq Composite	9.06%	–12.35%	–16.18%	–1.14%
DJIA	12.84%	–14.72%	–23.72%	–13.79%
MSCI EAFE	11.22%	–14.16%	–23.55%	–14.71%
MSCI Emerging Markets	4.95%	–16.05%	–24.19%	–17.31%
Russell 2000	11.68%	–23.20%	–31.92%	–25.19%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	2.66%	2.67%	8.33%
U.S. Treasury	1.70%	8.14%	13.02%
U.S. Mortgages	1.92%	2.82%	6.97%
Municipal Bond	7.86%	–0.27%	4.25%

Source: Morningstar Direct

What to Look Forward To

On Tuesday, the Conference Board Consumer Confidence Index for March is set to be released. Confidence is expected to fall from 130.7 in February to 114 in March, demonstrating that measures to halt the spread of the coronavirus are weighing heavily on consumers. The anticipated result would bring the index down to its lowest level in more than three years. As we saw with the University of Michigan survey last week, there is potential ahead for even steeper declines in consumer confidence given the rapidly escalating economic situation.

Tuesday will also see the release of the February international trade report. The trade deficit is expected to narrow from $45.3 billion in January to $39.5 billion in February. If estimates hold, this result would leave the trade deficit at its smallest gap since September 2016. A previously released trade report showed a modest increase in exports and a large decline in imports during February, which is expected to drive the overall narrowing of the trade deficit. Looking forward, both imports and exports are likely to drop sharply, given falling global demand in the face of the coronavirus pandemic.

Wednesday will see the release of the Institute for Supply Management (ISM) Manufacturing index, which is set to decline sharply from 50.1 in February to 46 in March. This is a diffusion index, where values above 50 indicate expansion and values below 50 indicate contraction, so this anticipated decline is worth monitoring. Manufacturer confidence fell steadily throughout 2019, as the trade war with China caused uncertainty that damaged manufacturer confidence. In January, however, this index was able to recover into expansionary territory to start off the year, so this swift decline below 50 is especially disappointing.

On Thursday, the weekly U.S. initial jobless claims report for the week ending March 28 will be released. Economists expect that 2,500,000 more unemployment claims will be filed during the week, following the unexpectedly high number of 3,283,000 claims made during the previous week. These reports would easily represent the largest two-week employment swing in U.S. history, demonstrating the unprecedented economic disruption in the second half of the month. The initial jobless claims report should be closely followed for the immediate future. It gives a relatively up-to-date look at one of the primary economic costs associated with widespread measures to combat the public health crisis.

On Friday, March’s employment report will be released. Economists are forecasting a decline of 100,000 jobs in March. If the estimates hold, March would be the first month with net job losses since September 2010. Also, it’s likely that this estimate undercounts the true employment situation during the month. As the survey was conducted during the second week of March, it does not capture the massive spike in unemployment claims in the third week of the month, as well as the anticipated jump in the fourth week. The underlying data is also expected to show weakness, with the unemployment rate set to increase from 3.5 percent to 3.8 percent. The job market showed some weakness to start off 2019, but it recovered in the fourth quarter and during the first two months of 2020. Accordingly, this anticipated decline is disappointing but not surprising.

Finally, we’ll finish the week with Friday’s release of the ISM Nonmanufacturing index for March. This measure of service sector confidence is expected to fall from 57.3 in February to 48 in March. Business owners have been contending with the headwinds created by social distancing and shelter-in-place orders that have swept the country. The March result would be in line with the large drop in the Markit U.S. Manufacturing and Services Purchasing Managers’ Index reports released last week. As was the case with the ISM Manufacturing index, this is a diffusion index where values below 50 indicate contraction, so the anticipated decline is worrisome. If the estimate holds, the index would sit at its lowest level since July 2009. Given the massive disruptions to businesses we experienced during the month, this result makes sense.  

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Authored by the Investment Research team at Commonwealth Financial Network.

 

Soaring Unemployment Signals First Wave of Economic Damage

The jobless claims report shows how many people have been laid off and are newly applying for unemployment assistance. And the latest one was a shocker. It revealed that three million people lost their jobs and applied for unemployment last week. To put this number in perspective, the previous record was just under 700,000 in 1982.

Further, the actual total is probably even worse. Reports around the country indicate that state unemployment offices are overwhelmed, and online systems are crashing under the demand. There are likely many people who have lost their jobs who simply have not had time to get into the system. Expect another spike in claims next week, and perhaps for the next several weeks.

Are We Headed for a Recession?

This report is the first wave of the economic damage we will see from the lockdowns. People can’t go to work, people can’t go shopping, and large sections of the economy (airlines, hotels, restaurants, and most retail stores) have simply shut down. These are the direct job losses that are now showing up. Over time, they will be followed by the indirect jobs losses in companies that support these companies. It will be a long process.

The net effect here will be to take the economy into a recession in the second and third quarter. We will see a series of scary economic reports: next week’s monthly jobs report will be very bad, and when the economic growth for the first quarter is released, expect more bad news. The second quarter will be worse, and there will be multiple less prominent reports that may also shake markets.

Why Are the Financial Markets Rallying?

The surprising thing is that, despite all this news and the terrible job loss numbers, financial markets seem to be rallying. How can that be happening in the face of both the existing and the pending bad news? Simply, markets were expecting a depression, and now that outcome looks much less likely.

The latest job loss numbers are certainly consistent with that expectation, but some things have changed since markets dropped hard. The first is that governments at various levels have taken actions to control the spread of the pandemic. It is true that case counts continue to rise, but the rate of growth has moderated—and may be declining. The second is that the Fed has gone all in on stabilizing the financial system and making financing accessible to businesses that need it. The third, and biggest, is that the Congress and White House have now agreed to a deal that directly injects cash to workers who can’t work and to businesses that have lost their customers. These are all programs that directly address the conditions that could take us into a depression. They have all been put into place quickly—before that depression can really take hold.

In other words, while the conditions for a depression may be in place, the policy response to prevent that depression is also in place. While some damage and a recession are certain, a depression is now likely avoidable. As such, markets have some room to recover, since the worst is now much less likely. Policy action has averted the worst case, and markets are reflecting that fact.

Will Policy Mitigate the Damage?

There are two things to keep in mind here. First, this is an elective recession, driven by the government lockdown policy. There are good medical reasons for the policy, but it is causing serious economic damage. Second, because this is a policy-driven recession, policy can also significantly mitigate the damage—which is what is now happening. This is a much more positive picture than what markets were expecting a week ago.

Keep this picture in mind when you look at the current jobless claims and the scary economic headlines on the horizon. Keep this in mind when you look at the rising case counts. We know what to do to solve these problems, and we are doing it.

The Good News . . .

Of course, the problems are not over. There will be mistakes and new issues, and things will potentially get worse than markets now expect. At the same time, whatever happens can now be expected to generate an offsetting policy response. The economy and markets will not be left to sort out a policy-driven recession on their own.

And that may be the best takeaway from this morning’s job losses. They are not random. Rather, they are an unfortunate cost of the policies required to solve a bigger problem. Recognizing that fact, the government is moving to help solve the consequent economic damage with the stimulus package. In both cases, government at all levels has proved to be capable of both understanding a problem and acting to solve it. In an era of political dysfunction, that is really great news.

Authored by Brad McMillan, CFA^®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network^®.

 

What the Stimulus Package Will (and Won’t) Do for the Economy

The Federal Reserve (Fed) has been consistently ahead of the coronavirus crisis. To help ensure that this medical crisis does not transmute into a financial one, the Fed stepped up early and hard. Not only did it cut interest rates essentially to zero, it also eased restrictions on banks to enable faster and more business lending. Plus, the Fed has taken unlimited measures to support the financial system as a whole, restarting programs from the last financial crisis to purchase bonds and inject money into the system.

So far, it seems the Fed has been successful in its efforts. The Fed and monetary policy have done what they can do, and they are poised to do more as needed. But monetary policy—think interest rates and bank regulation—can only do so much. What’s been missing, until now, has been direct policy support (i.e., writing checks) for workers and businesses. Spending money, known as fiscal policy, is the province of Congress. Now, it appears the two parties have agreed on a stimulus deal aimed at providing financial support—checks—directly to workers and businesses.

This deal is the missing piece in the needed policy support for the economy, and it should significantly mitigate the damage. Let’s take a closer look at what the stimulus package will (and won’t) do for the economy, starting with the numbers.

Unpacking the Stimulus Package

The package totals about $2 trillion, or almost 10 percent of the economy as a whole. It also includes provisions to enable the Fed and commercial banks to add up to another $6 trillion in temporary financing. This is real money, larger than what was done in 2008. Although it took longer, Congress has now gone big and hard to get ahead of the damage. And, like the Fed, there is likely more there if needed.

Nearly half of the package is direct payments to both people and firms. Individuals will get a $1,200 check, with an additional $500 per child, up to an income limit. Loan guarantees are available to small businesses, which convert to grants if the businesses maintain their payrolls. Unemployment insurance is now for 100 percent of lost wages for up to four months. There is also money to support the health care system, as well as state and local governments. Finally, a significant part will go to large businesses affected by the crisis, such as airlines.

In other words, there is something for pretty much everyone here. While there will undoubtedly be mistakes, it provides the framework for getting the economy through the crisis until something like normality returns. This program is what is needed to mitigate the long-term damage from the crisis.

What the Stimulus Won’t Do

What this package, and the Fed’s actions, will not do is prevent a significant short-term drop in the economy. The second quarter will be terrible, and the third quarter won’t be great either. With the lockdowns in place, with people unable to work or spend, preventing that decline is impossible.

What It Will Do

What can be done—and what the package is designed to do—is allow people and companies to survive during that period, despite that slowdown. People will be able to pay their rent and buy food, first with the initial check and then with the expanded unemployment insurance. Companies will be able to pay their rent, other expenses, and, in many cases, their people. Critically, with that support, both individuals and companies will be around to start working and spending again when the lockdown eases and when the economy starts up again—which is the goal.

There will certainly be collateral damage here. People will suffer, and some companies won’t make it through. But this program will help minimize that damage and help ensure that we have a functioning economy in a couple of months when the virus is brought under control.

Between the Fed and the proposed congressional action, we will have the policy response in place that we need to get through the next difficult weeks. There will still be damage, and there will likely be a need for additional policy response. If that’s the case, the signs are that both the Fed and the government will do what is needed, when it is needed.

The Real Message

There are two messages from the stimulus package. The first is that the money will be there, which is critical. It will support confidence from consumers and businesses, and it will help preserve both the capability and the confidence needed to keep the economy going.

The second, and in some ways more important, is that the U.S. government is up to the challenge of this crisis. That position will also help preserve confidence, which will help more than anything to resolve this crisis as quickly as possible.

Authored by Brad McMillan, CFA^®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network^®.

 

^{© 2020 Commonwealth Financial Network®}